Taxation is often considered the most significant difference for small business owners when evaluating S corporations vs. C corporations.
○ C corporations – C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
With both types of corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation.
○ C corporations – have no restrictions on ownership. Also, C corporations can have multiple classes of stock.○ S corporations – have restrictions on ownership. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights).
C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.